Select Committee on Culture, Media and Sport Fifth Report


61. In general, the creative industries rely upon one or more intermediaries as links between the creator and the consumer. The roles of the intermediaries may include financing, bearing upfront costs in commissioning and producing material; marketing and creating brand awareness; broadcasting content; collection of revenue; and distribution.

62. Despite the new opportunities for creators to distribute their work directly to consumers via the web, as outlined earlier, the role of the intermediary shows no sign of diminishing in the new media world and may in fact be gaining in importance. The British Screen Advisory Council foresees a trend towards very large content "aggregators" or "online hypermarkets", with all forms of content available for download,[153] and it suggested that the person in charge of the marketing or distribution, or the owner of the platform, would have the "dominant role" in future.[154] British Music Rights was confident that record label and music publishing roles were not set to disappear,[155] and the UK Film Council told us that the cost of creating awareness of a product was likely to remain extremely high for the foreseeable future, particularly given the "increasingly shrill cacophony of products all desperately seeking the attention of the consumer".[156]

63. This section of the report examines how the media industries are reacting to technological change in general; and it examines in more detail two issues of particular concern to broadcasters: the availability of spectrum, and rights for the transmission of programming on new media platforms.

The response of the media industries to new technology

Industry consolidation

64. Recent months have witnessed a constant stream of reports of mergers, acquisitions or collaborative deals between firms in different branches of the communications and media sectors. Ofcom recited a long list of company mergers and acquisitions in the communications sector, as firms jostled for a strong position from which to compete across different platforms.[157] These structural changes represent a response by companies striving to retain or expand their market position, disposing of divisions representing obsolete technology or acquiring other companies in order to reach new markets and spread their revenue base.[158] Hence BSkyB has acquired a broadband provider (Easynet) and a stake in ITV;[159] ITV has acquired a social networking website (Friends Reunited);[160] Tiscali, a broadband provider, has acquired the Homechoice brand (offering IPTV services); Sony Pictures has acquired Grouper, an Internet-based company specialising in user-generated video;[161] Google has acquired YouTube (a video-sharing website); and ntl has merged with Telewest (the owner of multichannel provider Flextech) and has subsequently purchased Virgin Mobile in order to offer broadband, TV, fixed and mobile telephony services under the Virgin Media brand.

65. Virgin's approach is an example of a organisation branching out of core business areas to offer a range of communications and entertainment services—the "triple-play" or "quadruple-play" concept under which consumers are offered packages of services such as broadband Internet access together with fixed telephony, mobile telephony and televisual content. BT pointed out that communications service providers were discovering that different platforms—particularly broadband—had the capability to deliver services previously considered the preserve of traditional broadcasters.[162] Ms Claire Enders, Chief Executive of Enders Analysis, was sceptical, however, that multiple-play packages would give operators a fundamental advantage, given the strong competition within each element of the package.[163] It remains to be seen whether packages will remain an attractive and successful business proposition in the long term.

Digital distribution

66. As noted earlier, as the market moves from sales of tangible products to online sales, the physical constraints of shelf space lose their relevance, creating the "long tail" effect whereby the sale of goods with only very limited demand can still be profitable. The BPI spoke of the "enormous" increase likely in the availability from the music industry of recorded music, due to the ability to overcome the restrictions of physical retail space by storing digitally,[164] and the UK Film Council noted that the ability of the supplier to offer an enhanced range of content would "increase exponentially".[165] The Council pointed out that whereas an average bookstore might stock 130,000 titles, more than half of Amazon's online book sales came from outside its 130,000 top titles,[166] suggesting that the market for books not available in an average bookstore may be larger than the market for those that are. The same could apply, in theory, to any form of creative content sold through retail outlets. Mr Highfield, Director of New Media at the BBC, has noted the potential for interest in television archives to generate a similar "long-tail" effect.[167]

67. Ofcom remarked upon the potential for film-makers to reach audiences more cost-effectively through download services.[168] When the BPI gave evidence to us in June 2006, however, the cost savings which might be expected from online distribution of music had yet to be realised: one producer told us that digital distribution actually cost more than distribution of physical products, although savings would emerge in time.[169]

68. The Creators' Rights Alliance was critical of recording companies for not offering higher royalties for sales of music as digital files, describing record companies' business models as "scandalous";[170] and the Music Managers Forum argued that potentially "huge" savings in manufacturing CDs and their accompanying booklets, and in packaging, storage and delivery costs, should allow record companies to offer a larger proportion of the sale price as a royalty to creators and performers.[171] Estimates of revenue retained by record companies from sales of music downloads vary from "above two thirds" of sale price for downloads (compared to 46% of sale price for CDs)[172] to 48% for downloads in the US.[173] The Creators' Rights Alliance told us that royalties from secondary exploitation of freelance creators' works[174] formed "the cornerstone of many earnings" and that it was not unusual for a composer to make 70% of their income from royalty payments.[175] Royalty levels range from as little as 4% of sale price (3-5 pence on a 79 pence download from iTunes) to perhaps 20% of dealer price.[176] The Forum described the present business model as "simply not sustainable for the vast majority of performers and creators" and it proposed an industry norm of 50% of net receipts for royalties on digital music sales.[177]

69. The British Phonographic Industry countered this argument, maintaining that digital distribution did nothing to reduce the costs of studio production and marketing which formed the greatest expenses in marketing a record.[178] It argued that the present percentage levels for royalties should be retained, citing increases in production costs and lower returns on individual sales, which meant that record companies took longer to recoup their initial investment.[179] PPL also challenged the assumption that online distribution was free distribution, noting that, in the music industry at least, there were up-front costs of digitally remastering tracks, converting them into new formats and making them available to online retailers.[180] Mr Mark Richardson, managing director of Independiente Records, said that costs of digital distribution, because these were very early stages of a developing format, were higher than distribution of hard copy, although savings would emerge.[181] Royalty levels are a commercial matter for negotiation between relevant parties. We acknowledge that, whatever the means of distribution of their product, recording companies incur a major part of their costs in identifying and promoting artists, the majority of which may never provide a return on the investment. As digital distribution increases, costs are bound to fall, as may revenues. We would expect the recording industry to ensure that there is a fair sharing of both risk and profits with creators.

70. The UK Film Council told us that it has commissioned research into the potential of digital platforms to enhance public access to British and specialised films and that the recommendations of the study would be taken forward via the Digital Screen Network.[182] Asked why it has taken so long to commission such research when digital channels have been around for quite a long time and there are channels available for many niche genres, the Chairman of the Film Council, Stewart Till, said there is "an evolution rather than revolution" underway and in future there would be hundreds of film channels and a blurring between a pay movie channel available for a monthly subscription or as part of a subscription package, video on demand and other forms of distribution. John Woodward, Chief Executive of the Film Council, said that delivering films to British viewers via a linear television channel was "where the industry came from in terms of electronic delivery of films" but "where it is moving away from as well". Mr Till thought it was vital that British producers and distributors obtain at least parity with the American studios in their deals with the various providers of video on demand film services, and said that the pay television deals that Sky did at the end of the 1980s/early 1990s were "probably the worst thing that happened to the British film industry in the last 20 or 30 years" and it was important not to see this repeated. We note that, at the time, Mr Till held the position of deputy managing director at Sky Television and subsequently Head of Movies at BSkyB.

71. While the research initiative to enhance public access to British and specialised films is welcome, it is surprising that it has taken as long as it has to commission such research and advance the use of digital platforms to promote British film. Digital platforms have been operating in the UK for many years now and in that time hundreds of services have been launched in a range of niche categories, including dedicated film channels on digital broadcasting platforms and online services such as and Channel Four's broadband documentary service 4Docs. As the strategic agency for film in the UK whose aim is to stimulate a competitive, successful and vibrant UK film industry and culture, and with multi-million pound Government funding, the Film Council might have been expected to have commissioned and reported on this area some time ago.

Adapting and developing business models

72. The media and communications industries have entered a period of great uncertainty about how to construct viable business models, given that audience behaviour towards consumption on the newest media is largely untested. The British Screen Advisory Council said that its members were "experiencing very dramatic technological changes which are forcing them to think about their business in new ways which are themselves leading to new technological innovations".[183] The UK Film Council told us that people running businesses in the films sector were "literally making it up as they go along" and struggling with the move from a stable business model which had been in place for 15-20 years to an on-demand model, where transaction volumes and typical profit levels were not yet known.[184] It is not yet clear how far sales of content using a new platform cannibalise sales using an existing one, although the Mobile Broadband Group asserted that content consumption on mobile and on traditional TV were "not close substitutes" and that mobile TV was a complementary service which offered opportunities for additional revenue for rights holders.[185]

73. On-demand models can take various forms: users can pay per item; they can pay a period subscription entitling them to limited or unlimited access to a library or catalogue; or downloads can be free at the point of use, with revenue secured through advertising. Users can pay to own in perpetuity or to rent, in which case time limits can be set within which a downloaded file must be opened or viewing must be completed. Examples of the pay-per-item approach include iTunes (for music tracks) and (for film); examples of the subscription approach include Napster UK and Rhapsody.[186] Both models can run in parallel (as with Channel 4's Video on Demand service).

74. A typical business model for content available on mobile phones has been for items to be made available individually for download to mobile handsets, for the mobile operator to take 50% of revenue, and for the remainder to be paid to the content producer, who pays royalties and other costs.[187] User-generated content supplied by Hutchison 3G (H3G) customers is made available to other H3G customers to view and download. For each download the contributing customer receives a small payment. In March 2006, H3G told us that there were over one million such downloads per month.[188] More recently, reports have suggested a shift towards free provision of TV content to mobile handsets, funded by advertising.[189]

75. Various witnesses identified limitations to on-demand services. The British Screen Advisory Council (BSAC) told us that video-on-demand would, to some degree, substitute for television viewing; but it maintained that there remained a role for linear broadcasting, noting that the scheduling of a particular programme at a particular time on television would provide a focus for marketing and branding, in much the same way that cinema release provides a focus and generates publicity.[190] The Deputy Chairman of BSAC pointed out that generating demand for a TV programme was hard unless it had first been offered for free.[191] Mr Anthony Lilley, Chief Executive of Magic Lantern Productions, reminded us that the declining cost and increasing capability of storage capacity was driving the development of hardware which could store an almost infinite range of television programmes. As he said, if a viewer has a choice between watching a programme either by paying to download it or by selecting it at no cost from a Personal Video Recorder, that was "a really easy call". He added that "in content company terms, this was a disaster waiting to happen" and that there was potential for such companies' secondary markets to be "very badly dented" within years rather than decades.[192]

76. In June 2006, the BPI described subscription services in the music industry as being "very, very much in their infancy" and told us that work was still being done to establish ways of ensuring that creators could be properly remunerated from subscription sales. It did anticipate that subscription services would grow in importance in the relatively near future but warned that exact patterns were difficult to predict.[193]

77. Broadcasters have, of course, used for some years a subscription model for linear TV broadcasts using digital terrestrial television, satellite or cable platforms. We were told by Channel 4, however, that it had not in the past derived much revenue from subscription fees, as the platform owner had taken the lion's share and rights holders (particularly in broadcasts of sport and film) had also taken a large chunk.[194] Two channels from the Channel 4 family have moved from a subscription model to a free-to-air model funded through advertising: E4 and FilmFour. We note that subscription revenues earned by platform operators are now the single largest source of revenue in the television sector, achieving almost £3.9 billion in 2005.[195]

78. Other providers offer a mix-and-match of pay-per-view, subscription or combination deals. Hutchison 3G indicated that it was moving towards "bundling" of services, offering quotas of calls, TV stream hours and downloads as a more customer-friendly alternative to charges for individual transactions.[196] BT has identified flexibility as an attractive consumer proposition and offers its BT Vision service through a range of payment models, including subscription, pre-payment, pay-as-you-go and pay in arrears.[197]

79. We were particularly struck, during our visit to Korea in 2006, by some of the business models used in the interactive games industry. One game in particular—Kart Rider—was marketed as a family game and was treated by its manufacturers as an entry point for drawing in a new customer base. The game could be downloaded and played for free but derived revenue from customisation and personalisation of characters (or cars), using micropayments made online, for sometimes very small sums.[198] However, the number playing—sometimes 200,000 at any one time—had made it a very successful business model.

Business models in the film industry

80. The film industry has traditionally attempted to maximise the revenue stream from its creative product by exploiting it through a system of rights windows. At present a typical rights cycle involves release of a film on DVD four months after cinematic release, 12 months from cinematic release to release on pay television, and another 12 months before release on free-to-air television.[199] Ofcom said that the system had served to prevent excessive cannibalisation of revenues, although intervals between release windows have tended to shorten.[200]

81. The UK Film Council identified four forms of exhibition rights between release of a film on DVD and the screening of a film on free­to­air terrestrial television:

—  Video On Demand (VOD) whereby the consumer purchases films on a title-by-title basis;

—  Pay-Per-View, currently equivalent to Near Video On Demand;[201]

—  Subscription VOD (SVOD) in which the consumer pays a monthly fee and is able to access an unlimited or large number of titles against that payment;

—  Other pay-TV windows.[202]

82. The UK Film Council believed that once video on demand became established, the market would get "much, much more complicated".[203] The present time-lapse between cinematic release and DVD issue (four months) is already coming under pressure from rights holders anxious to deny the opportunity for piracy—a matter which we address in more detail at paragraph 147.

83. The Cinema Exhibitors' Association forecast that Video on Demand, "in all its guises", would ultimately take over from the rental and sale of DVDs as the largest source of income for film producers, although security of delivery and of payment systems would need to be established first.[204] The Association told us of evidence that, as in the music industry, returns to rights holders per download in the US (where on demand models had been in place for longer) were proving to be significantly lower than returns per DVD sold: $4 from a $10 transaction as opposed to $12 from a $16 one. It also suggested that the costs imposed by distributors of download and Video on Demand services appeared to be higher than those imposed by distributors of products in traditional formats.[205]


84. Much has been made of trends in advertising on commercial television. Ofcom noted research by PriceWaterhouseCoopers in 2005 suggesting that TV advertising would continue to show "real growth" at least up until 2014,[206] and the recent upward trend for net advertising revenue in the television industry continued in 2005. Growth from 2004-2005, however, was modest at 1.9%, down from 7.4% from 2003 to 2004, and all of that growth was attributable to commercial multichannels rather than mainstream analogue channels.[207] The Institute for Practitioners in Advertising (IPA) stated that it "would never foresee particularly dramatic growth in television advertising in the foreseeable future" and it doubted that ITV would be able to maintain its present public service obligations if advertising revenues were to continue to decline.[208] It observed that ITV's ability to attract mass audiences of 15 million or more was being eaten away.[209]

85. While this inquiry was under way, Ofcom held a consultation on proposals to restrict advertising to children of foods high in fat, salt or sugar content. It set out its preliminary conclusions in November 2006 and stated its intention to introduce a total ban on the television advertising of all such foods in and around programmes of particular appeal to children under the age of 16.[210] The Government endorsed Ofcom's approach.[211] On 22 February 2007, Ofcom published its final statement, announcing that introduction of the ban would be phased and would apply from 1 April 2007 to programmes of particular appeal to children aged from 4-9 years, and from 1 January 2008 to programmes of particular appeal to children aged from 4-15. Grim forecasts were made by various commentators about the effect upon commercial broadcasters' advertising revenue, and Ofcom has estimated that the economic impact upon television companies will be in the region of £20 million.[212] PACT and others have expressed alarm about the impact of the restrictions on original children's programming, and we will examine this further in our forthcoming report on Public Service Media Content.

86. The greatest threat to television advertising lies in the phenomenal growth of online advertising, described by one witness as "the hottest place to be at the moment".[213] Figures from the Advertising Association show that advertising on the Internet recorded by far the largest gain of any advertising sector in percentage terms in 2005, rising by 65.6% when measured at current prices (62.3% in real terms) to reach £1.36 billion, up from £825 million in 2004. This rise dwarfs the increase in advertising expenditure in the television sector (3.6% in current prices, 1.5% in real terms). Advertising expenditure in the press, cinema and radio sectors actually fell in both current prices and real terms over the same period.[214] Spending on online advertising was worth £917.2 million in the first half of 2006 alone, according to the Internet Advertising Bureau.[215]

87. We sought witnesses' views on how far advertising on digital media would cannibalise advertising on more traditional media. Commercial broadcasters dependent upon advertising were gloomy in tone. Channel 4 told us that the development of many and varied means of accessing televisual content was fragmenting audiences and (as a consequence) advertising revenues, which had historically justified the major expenditure involved in commissioning and funding new content. There was therefore a risk that quality would suffer.[216] ITV advanced essentially the same argument as did Channel 4, predicting a further decline in its share of advertising expenditure and concluding that it would be difficult to maintain investment in programming unless it was able to diversify beyond existing revenue streams.[217] Channel 4's Chief Executive offered his personal view that, in ten years' time, between a third and a half of all TV viewing would be timeshifted[218] but without any overall increase in TV viewing.[219] Ofcom, however, does not accept that opening up revenue streams through exploitation of new media rights need necessarily be at the expense of revenue derived from sponsorship or advertising supporting traditional broadcasts.[220] It does accept, though, that there is potential for certain on-demand rights to lead to a substitution for conventional viewing of scheduled programming, posing a threat to advertising and sponsorship revenue.[221]

88. Ingenious Media, a major investor in the new media sector, agreed that there was indeed an "advertising cake" to be shared between different sectors and that the digital outlet would draw away from, rather than complement, traditional media.[222] It also noted the potential for further erosion of audiences for television advertising through the use of Personal Video Recorders (PVRs) to "skip" advertising.[223] Talkback Thames TV cited research suggesting that PVR owners fast forward through adverts three times out of four.[224] The Chief Executive of Channel 4 believed that it would take a few years before the impact of "ad-skipping" on PVRs and Sky+ became clear, but he feared that it could be "very, very difficult" for Channel 4.[225]

89. A more optimistic view was put to us by the Institute of Practitioners in Advertising (IPA), which told us of evidence that the "break bumpers"3—brief clips promoting a programme's sponsor and framing advertisement breaks—were getting "incredibly high attention levels" because of their use as navigation points, and that there was also an impact upon advertisements at the beginnings and ends of breaks. The IPA therefore challenged assumptions that viewers would habitually skip adverts, pointing out that "ad avoidance" was not a new phenomenon in any case.[226]

90. The IPA argued that the vast majority of the country did not want to spend substantial sums monthly on subscription fees and that there were many for whom the availability of hundreds of channels on satellite or cable platforms held no attraction—indeed, they might be deterred by the technology. Such people would continue to watch free-to-air programming, much of which would be funded through advertising.[227] As noted above, Channel 4 has moved from a subscription model for its FilmFour and E4 services to an advertising-funded model. In both cases, this was to widen public access; Channel 4 told us that FilmFour, when broadcast as a subscription channel of the Sky satellite platform, had reached between 300,000 and 400,000 homes. By moving to a free-to-air funding model supported by advertising, the channel had an immediate reach of 17 million homes.[228]

91. We note that advertising is taking root in forms of content which are perhaps only at the start of their developmental curve. One witness told us that websites built around user-generated content (such as MySpace and YouTube) were starting to generate advertising revenue.[229] Google Video operates a policy of free uploading and free viewing of video content unless the content owner chooses to charge, whether for viewing, for download or for subscription to their content. The business model, as with most Google services, is built upon advertising. Google did not rule out, however, deriving revenue from viewers and downloaders at some point in the future.[230]

92. Other new ways of using advertising to support business models include:

—  Niche advertising on niche channels, which may well continue to proliferate;

—  Real-time advertising in interactive games hosted on the Internet (for instance on interactive advertising screens around a virtual racetrack);[231]

—  Plans to screen advertisements to precede free downloading of music tracks;[232]

—  Integration of advertising into video downloads;[233] and

—  The possible future gradation of subscription fees (once technology allows), with lower subscription rates for viewers who watched advertisements.[234]

93. We note that the proposed EU Audio Visual Media Services Directive may enable a more liberal regime in respect of product placement[235] by allowing a derogation from the existing ban to permit product placement (unless Member States decide otherwise) in cinematographic works, films and series made for audiovisual media services, light entertainment and sports programmes.[236] If taken up, such a derogation could help to sustain advertising revenue although it is likely that the potential income will be small in comparison to broadcast advertisements. PACT noted that some genres (such as sport and entertainment) lent themselves better than others to product placement; and it suggested to us that if product placement were to be used sensitively and creatively, it would not have an adverse effect on the content itself.[237] Research by Ofcom has also noted public support for product placement which was "relevant to the programme and subtle".[238]

94. There is no doubt that commercial broadcasters will come under increasing pressure from fragmentation of audiences and of advertising revenue. We are convinced that there will remain a market for televisual content free at the point of use but the decline in revenues from traditional advertisements may be permanent. We believe that commercial broadcasters will need to adopt a flexible approach and to be willing to diversify. Broadcasters are already recognising the need to tap into the online market themselves and to make use of opportunities presented by the development of technology, e.g. the ability to integrate advertisements into downloads on demand. We also encourage Ofcom to take advantage of the proposed derogation in the Audio Visual Media Services Directive, under which limited use may be made of product placement. We will examine further the implications of the decline in advertising revenues for the provision of public service media content by commercial broadcasters in our forthcoming Report on this issue.

Availability of spectrum

95. Terrestrial broadcasters, satellite broadcasters and mobile phone companies offering video and audio content rely upon access to spectrum, a commodity which is finite and which has traditionally been allocated for fixed terms by the Government and regulators. The switchover from analogue signal to digital signal for terrestrial television broadcasting will free up a particularly valuable range of spectrum, well suited for many technologies, including mobile services, wireless broadband, as well as more digital television services in both standard and high definition. This was one of the principal justifications given by the Government for going ahead with the switchover project.

96. We note that Ofcom is moving towards a market-based approach for the general allocation of spectrum. However, Ofcom is also undertaking a review of how the released spectrum should be re-used and re-allocated once switchover is completed: the Digital Dividend Review (DDR). In summer 2007 Ofcom expects to release a statement on the outcome of the DDR and to launch a second consultation on detailed proposals for the award of spectrum. A second DDR statement is expected in early 2008 with a view to commencing awards of spectrum later in the year. Under current proposals, the multiplexes on which digital terrestrial channels are presently carried will be allocated 32 of the spectrum channels in the 470-862 Megahertz band. Ofcom is conducting a separate consultation on whether broadcasters might, after 2014, have to pay for that spectrum under an Administered Incentive Pricing model.[239] Most of the remaining spectrum is likely to be auctioned. Ofcom has stated clearly its intention to remain neutral between competing technologies, not favouring one over another.[240] The Government has declared that it supports Ofcom's proposals to auction on an open basis the spectrum released by switchover and views such an approach as consistent with the Government's established policy.[241]

97. The proposal to use the Administered Incentive Pricing model for channels which have hitherto had free access to spectrum has been criticised by public service broadcasters.[242] Ofcom maintains that a requirement to pay merely brings broadcasters into line with most other spectrum users, including the emergency services and the Ministry of Defence. It adds, furthermore, that it has a duty to secure optimum use of spectrum and that that duty is best met by providing incentives to users to adopt technologies which enable effective and minimal use of spectrum. Ofcom suggested that the cost to broadcasters, maybe in the region of £3 million per year for a channel such as ITV 1, is comparatively small in relation to the previous licence fee payments and other regulatory burdens imposed on commercial broadcasters, and could be absorbed.[243]

98. Pressure is being applied upon Ofcom by broadcasters to reserve some of the released spectrum for high definition television services (HDTV), in order to preserve consumer choice.[244] Ofcom is also being urged by the programme-making and special events (PMSE) sector, which relies upon interleaved spectrum in the existing analogue TV bands for the operation of radio microphones by outside broadcasters and in theatres, to ensure that spectrum continues to be made available at a rate which the sector can afford. These concerns were aired in a recent debate on the floor of the House, when the Minister made it clear that Ofcom was aware of the sector's fears.[245]

99. Others are concerned that the process of re-allocating spectrum should not be unduly prolonged. We noted over a year ago, in our report on analogue switch-off, the concerns of transmission companies such as Arqiva that the lengthy decision process of the Digital Dividend Review would jeopardise the UK's present lead in the relevant technologies.[246] Those concerns remain strong. The Mobile Broadband Group described the limited availability of radio spectrum as "a significant inhibitor of mobile TV services market development in the UK",[247] and it urged Ofcom to allocate frequencies without delay if the UK was not to be left behind other European states. The Group suggested to us that the UK could find itself the only country in Europe where the London 2012 Olympic Games and Paralympic Games could not be watched on a mobile device using the DVB-H standard.[248] BT, however, expressed confidence that the Games could be broadcast to mobile handsets using either the DAB or DVB-H format in at least some of the country.[249] Ofcom was careful to say only that it expected that spectrum would be available in 2012 for mobile television, and that additional spectrum to be released shortly (not under the Digital Dividend Review process) was well suited to Digital Multimedia Broadcasting (DMB) technology capability.[250] It did, however, float the possibility of a staged release of spectrum while the switchover process is under way, region by region, or even early release of a block of spectrum nationally.[251]

100. Although we will continue to listen to the arguments, we do not believe that a persuasive case has yet been made to justify reserving spectrum for High Definition Television following digital switchover, and we endorse Ofcom's approach in not favouring any particular technology or application in the framework being drawn up for re-allocation of spectrum under the Digital Dividend Review. However, we do recognise the special case of the programme-making and special events (PMSE) sector which risks losing access to spectrum it has traditionally enjoyed as a result of switch-off and we believe that it is essential that an acceptable solution to their difficulties be found.

101. The Digital Dividend Review is complex and its outcome will have far-reaching consequences; we accept that Ofcom should not be pressured into taking hasty decisions. But it should bear in mind that delays in reaching decisions in the DDR process create uncertainty for all and can have adverse economic consequences for some. We shall be addressing the Review further as our current inquiry into public service media content evolves.

New media rights for televisual content

102. We have already outlined the importance of compelling content in driving the development of new media platforms. As new forms of broadcasting materialise, and new operators enter the field, competition for secondary rights to attractive content has intensified. [252] Producers of that content, therefore, have sought to maximise their ability to exploit and extract revenue from those secondary rights. Over the years a three-way tug-of-war has developed between producers, commissioners (generally the public service channels) and non-traditional media operators, all seeking a measure of control.

103. The market for new media rights—secondary rights—is currently small, although it is generally recognised that it will expand.[253] Ofcom listed possible new media rights categories:

  • Simulcast distribution of the programme on digital channels across different platforms (e.g. Internet, mobile, as well as traditional broadcast platforms)
  • Time-shifted distribution—on traditional broadcast platforms and alternative distribution platforms
  • On-demand services—via free to view, pay per view or subscription
  • Re-purposing and re-versioning of content.[254]

The Codes of Practice and associated terms of trade

104. Section 285 of the Communications Act 2003 established a duty upon each licensed public service channel to draw up and revise from time to time a Code of Practice setting out the principles to be applied by that channel when agreeing terms for the commissioning of independent productions. Each channel's Code of Practice must secure, amongst other things:

  • sufficient clarity at the time of commissioning about the categories of rights covered;
  • sufficient transparency about amounts to be paid in respect of each category of rights; and
  • satisfactory arrangements for the duration and exclusivity of those rights.

At the time that the Communications Act was debated, these provisions were perceived as offering new levels of protection for the interests of independent producers. One witness described the impact of the changes in television production rights—and the increased scope for producers to exploit their content both in the UK and internationally—as being very important in attracting new investment into the sector.[255]

105. The new Codes of Practice were introduced by broadcasters at the beginning of 2004. The BBC told us that its Code had been "instrumental" in clarifying the ownership of primary and secondary rights and that the challenge was to keep the framework "relevant in a changing world", always ensuring that the right of independent producers commercially to exploit their intellectual property did not impinge on the BBC's ability to serve the licence fee payer.[256]

106. Despite the general acceptance of the value of establishing Codes of Practice, the terms of trade drawn up under those Codes, governing new commissions and the distribution of rights to broadcast programming, never commanded full support from interested parties. Channel 4 argued that the terms had had a disproportionately negative effect upon it, as other public service broadcaster competitors (BBC and ITV) had substantial in-house production capacity which was not covered by the agreement. Channel 4 took the view, in its response to Ofcom's recent consultation on the television production sector, that a portion of its audiences would use new media platforms and on-demand facilities as alternatives to viewing linear broadcasts, with a direct impact on viewing figures on traditional platforms (and therefore advertising revenue). Channel 4 therefore sought to revise the terms in a way which would allow it to have access to a wide range of new media rights as part of the primary rights package.[257]

107. The Satellite and Cable Broadcasters' Group (SCBG) stressed that its members relied upon being able to acquire secondary rights in order to build audiences and thereby generate revenue to finance the commissioning of new material.[258] The Group pointed out that the negotiations which were then taking place between PACT (representing independent production companies) and the terrestrial broadcasters on updating terms of trade had been bilateral only and that, if anything, acquisition of secondary rights was becoming harder rather than easier for Group members.[259] The SCBG accused Ofcom of failing to ensure that PACT and the terrestrial broadcasters took account, in their negotiations, of the need to ensure a strong competitive market in secondary rights.[260]

108. The SCBG also claimed that terrestrial broadcasters took advantage of their public service status and privileges, which enabled them to finance the majority of UK programme commissioning and then take a restrictive attitude in releasing secondary rights to their programming.[261] It cited a number of occasions when an independent channel had sought to acquire secondary rights to material which it had commissioned jointly with a terrestrial broadcaster but had met a determined attempt by the terrestrial partner to acquire for itself exclusive rights (or the inclusion of secondary rights as part of an all rights bundle) by exerting pressure upon the producer, sometimes giving the impression that the producer stood to lose out in future unless it agreed to the terms proposed by the terrestrial broadcaster.[262] We note, in passing, that the UK Film Council identified a similar problem in relation to film and warned that "rights creep" of this sort "would be to the severe detriment of both consumers and citizens".[263]

109. The SCBG was not alone in directing criticism at traditional broadcasters for taking a restrictive attitude. BT called upon the BBC to use its position as a provider of publicly-funded programming to stimulate the growth of new media "by allowing reasonable and fair access to its programming".[264] Hutchison 3G described the process of securing TV content for mobile networks as "very frustrating",[265] singling out the BBC's attitude towards providing content as having thus far been "mixed at best and contradictory at worst".[266] The Mobile Broadband Group told us that simulcasting[267] of TV channels to mobile phones had to be interrupted when rights clearance for a programme could not be obtained. It called for a rights framework which delivered a "clear, consistent and timely rights regime for all platforms" and minimum holdback periods.[268] BT, although declaring itself as reasonably content with progress in reaching agreement with content providers in acquiring rights for content for its BT Vision service,[269] made a similar appeal.[270] SCBG urged Ofcom to intervene to ensure that terrestrial broadcasters' purchase of primary rights for their terrestrial channels did not confer automatic rights to broadcast on their digital channels, and it advocated an entirely separate negotiating process for the purchase of secondary rights, open to competition under the control of the independent producer.[271]

110. PACT agreed that broadcasters sought to exercise their bargaining power, gained through their dominance of the market for commissioning new material,[272] by "bundling" rights for broadcast on non-traditional platforms in with primary rights for no additional cost. PACT said that this "clearly represents a transfer of value back to the terrestrial broadcaster, negating the impact of the Codes of Practice laid out in the Communications Act 2003 and potentially undermining the business model of PACT members".[273] Ofcom has confirmed its view that the main terrestrial broadcasters are likely to remain the main buyers of programming and will therefore retain much of their negotiating strength.[274]

111. PACT had specific concerns about practices by broadcasters which it perceived as damaging to producers' interests. Two practices came in for particular criticism: the use in commissions of "holdback" periods, in which a broadcaster has the right to prevent a producer exploiting secondary rights within a fixed period of time; and "warehousing", a term for the practice of acquiring rights but not subsequently exploiting them. It argued that the holdback provisions, which broadcasters negotiated with producers allowing them to restrict onward sales of programming ran counter to the intention of the Codes of Practice.[275] The Satellite and Cable Broadcasters' Group agreed, believing that holdback periods, by denying public access, created a window for piracy;[276] and it argued that holdback in general should be "significantly reduced or eliminated".[277] Video Networks Ltd., who, at the time that evidence was received for this inquiry, were suppliers of the Homechoice service offering TV and radio channels via broadband, noted the "chilling" effect of holdback periods.[278] With regard to "warehousing", PACT claimed that incumbent broadcasters had a long history of such practices, which it viewed as being designed to deny new entrants access to content and thereby to stifle secondary markets.[279] It maintained that the practice was damaging to the public interest, to producers' commercial interests and indeed to broadcasters' interests.[280]

112. The BBC defended itself against these attacks and maintained that there were "numerous examples" of its efforts to make its content available on-demand, for example on a cable platform or through Homechoice (now Tiscali TV). It also cited an agreement with Orange to make clips from BBC comedy productions available on mobile phones.[281]

New terms of trade

113. During the course of the inquiry, the main public service broadcasters agreed individually with PACT new structures for rights governing use of content supplied by independent producers. The new terms were outlined in evidence to us by Mr Highfield, Director of New Media and Technology at the BBC;[282] but they have since evolved. Under the current provisions, there will be an initial window in which the BBC will have an exclusive licence of up to five years in the UK television market (with an option to renew for a further two years), depending on genre and channel of initial broadcast. Viewers will be able to:

  • preview programmes up to seven days prior to first linear broadcast;
  • "catch up" on viewing or listening by downloading content within seven days of transmission and then opening the downloaded file within thirty days; and
  • "stack" series programming up until seven days after linear transmission of the final episode, subject to a maximum thirty day period of programming being available on demand at any one time.

The second window would open once the first had closed: at this point BBC content would become available for commercial exploitation. The standard policy for release of a returning series for commercial exploitation will be for a first series to be released once two further "runs" of the series have been transmitted.[283]

114. The agreement concluded between PACT and Channel 4 differed significantly from that made with the BBC. Channel 4 licences will in future last for three years rather than five; and Channel 4 will be able to offer content on demand for up to 30 days after transmission. Channel 4 will have the flexibility to decide what charges, if any, it will make for such downloads and how the business model will work. Once the 30 days have elapsed, the programme rights will revert to the producer unless Channel 4 seeks to extend its exclusive licence, in which case the producer will either accept the price offered or will keep the rights with a holdback condition that they cannot be sold to another broadcaster for a further five months.[284] Channel 4 expects to achieve commercial deals in the vast majority of cases.[285] The "warehousing" issue was resolved by undertaking to include a "use or lose" clause in commissioning contracts, so that new media rights not exploited within a specified timeframe would automatically be released from broadcaster to producer.[286]

115. Channel 4 told us that it was "comfortable" with the deal that had been struck and that it genuinely represented a "win-win" situation for both sides.[287] In further discussion, however, it acknowledged that the agreement was "not ideal" and that adjustments might be needed in future to some of the detail, including splitting of revenue.[288] More recently, the Chief Executive of "Five" has told us that she was "very relieved" that the new terms of trade had been described as short-term solutions. She believed strongly that advertising revenue from on-demand services could replace rather than supplement revenue from more traditional funding formulas (i.e. advertising on terrestrial services), and that for producers to take a share of the revenue from advertising-funded on-demand services (as is envisaged under the new terms) could lead to a net decrease in income for the broadcaster.[289]

116. PACT clearly believed that it had made a significant advance in the new deals. It was confident that what had been achieved was "very, very good news for satellite and cable broadcasters" and would make products available in the market sooner,[290] and it welcomed in particular the acceptance that a commissioning agreement for broadcast on a primary channel could not "bundle" up rights for secondary channels.[291] We note, however, that rights for transmission of content to mobiles at the same time as linear broadcast on television will rest with the broadcasters.[292]

117. The new terms of trade between producers and broadcasters have swung the balance towards producers. Steps to strengthen the ability of content originators to retain greater control over their rights are welcome; but commissioning channels need to be able to derive fair value for the product which they have financed, particularly as the climate for advertising on terrestrial television becomes harsher. While we welcome the fact that agreement has eventually been reached between producers and broadcasters, we expect that a further review of the terms of trade will become necessary once the value of on-demand services to broadcasters' funding models becomes clearer—probably sooner rather than later.

118. Some of the restrictive practices described to us in evidence as being used by broadcasters when commissioning programming and driving deals on rights for future transmission were, if accurately reported, counter to the spirit of the Communications Act. We believe that they are less likely to occur under the new terms of trade, although Ofcom must remain vigilant.

153   Q1 Back

154   Q3 Back

155   Q 94 Back

156   Ev 262 Back

157   Q 430 Back

158   See Ingenious Media Ev 226 Back

159   The IPA forecast that Sky would "drive broadband very aggressively" because of its revenue potential in the next few years: Q 424 Back

160   Ev 384 Back

161   Financial Times 23 August 2006 Back

162   Ev 98 Back

163   See Ms Enders QQ 45 and 46 Back

164   Q 119 Back

165   Ev 263 Back

166   The "long-tail" phenomenon: see Ev 263 Back

167   Independent 14 August 2006 Back

168   Ev 191 Back

169   Q 125 Back

170   Q 96 Back

171   Mr Stopps Q 95 Back

172   Mark Mulligan, vice-president of Jupiter Research: see Sunday Times 11 June 2006 Back

173   Comparative analysis of the UK's creative industries, Frontier Economics, August 2006, page 86: figures drawn from OECD sources. Back

174   i.e. royalties from performances or transmissions over and above the number specified in the original commission Back

175   Ev 50 Back

176   Ev 30 and Q 95 Back

177   Ev 30 Back

178   Q 125 Back

179   Q 129 Back

180   Q 104 Back

181   QQ 125-6; this statement was made in June 2006. Back

182   Ev 263 and UK Film Council Annual Report for 2005-06. The Digital Screen Network aims to use digital technology to widen access to specialised film by overcoming the cost barrier of 35mm celluloid prints. Back

183   Q1 Back

184   Q 590 Back

185   Ev 88 Back

186   Ofcom Ev 190.  Back

187   Ingenious Media Q 506 Back

188   Ev 84; also Q 174 Back

189   Guardian 7 September 2006 Back

190   Q 11 Back

191   Q 13 Back

192   Q 40. The British Equity Collecting Society argued that PVRs and similar devices would "inevitably reduce the value of the secondary market": Ev 343. Back

193   Q 133 Back

194   Q 399 Back

195   The Communications Market 2006, Ofcom, page 204 Back

196   Q 171 Back

197   Ev 99 and Q 209 Back

198   See also Mr Livingstone Q 488 Back

199   Q 600 Back

200   Ev 199; see also UKFC Ev 264 Back

201   Availability of a programme on demand but at a series of set times. Back

202   See UK Film Council Ev 264 Back

203   Q 600 Back

204   Ev 358 Back

205   Ev 360 Back

206   The Communications Market 2005, Ofcom, page 197 Back

207   The Communications Market 2006, Ofcom, page 205 Back

208   Q 417 Back

209   Q 419 Back

210   Ofcom Press Release, 17 November 2006 Back

211   See for instance DCMS Press Release 146/06, 17 November 2006 Back

212   Oral evidence from Ofcom to the Culture, Media and Sport Committee and Trade and Industry Committee on 17 April 2007, on the Ofcom Annual Plan for 2007-08, Q 51, HC 459, Session 2006-07. Back

213   Mr Lilley Q 44 Back

214; figures current in September 2006 Back

215 Back

216   Ev 165 Back

217   Ev 383 Back

218   Viewed at a time other than that of linear broadcast  Back

219   Q 377 Back

220   Ev 199 Back

221   Ev 203 Back

222   Q 503 Back

223   Ev 229. See also ITV, Ev 382 Back

224   Ev 446 Back

225   Q 397 Back

226   Q 423 Back

227   Q 424 Back

228   Ev 165 and Q 399 Back

229   Mr Bradley, Director, Ingenious Media, Q 500 Back

230   QQ 535-7 Back

231   Ev 229 Back

232 see The Guardian 30 August 2006 Back

233   Q 505 Back

234   Institute of Practitioners in Advertising Q 423 Back

235   The appearance or "placement" of a commercial product in a programme as part of a commercial transaction Back

236   Article 3i of Non Binding Working Document on the Directive, published in March 2007 Back

237   Q 374 Back

238   The future of television funding, Ofcom September 2005 [cited by Talkback Thames Ev 446] Back

239   Administered Incentive Pricing: the charging of annual fees for the holding of spectrum that reflect the opportunity cost of the holding of that spectrum. See Future pricing of spectrum used for terrestrial broadcasting, Ofcom consultation document, paragraph 1.8, July 2006 Back

240   Q 445 Back

241   Budget 2007, HC 342, paragraph 6.43 Back

242   See response from the BBC to the Ofcom consultation on spectrum pricing: Back

243   QQ 449-50 Back

244   Financial Times, 19 April 2007 Back

245   HC Deb 6 March 2007, col 1489 Back

246   Analogue switch-off: Second Report of the Committee in Session 2005-06, HC 650-I, paragraph 57 Back

247   Ev 88 Back

248   Ev 88 and Q 176 Back

249   Q 206 Back

250   QQ 444-5 Back

251   Q 444 Back

252   Rights to broadcast after primary transmission, typically including rights for broadcast on new media platforms  Back

253   In early 2006, new media rights accounted for approximately one-fifth of all non-TV production turnover: Ofcom Ev 198 Back

254   Ofcom Ev 197 Back

255   Ingenious Media Q 515 Back

256   Ev 137 Back

257   Ev 166 Back

258   It noted an increase of 19% per year in original UK commissioning by multi-channels over five years: Ev 120 Back

259   QQ 285 and 288 Back

260   Q 286 Back

261   Ev 124; See also Video Networks Ltd, Ev 446 Back

262   Ev 122 Back

263   Ev 264 Back

264   Ev 105 Back

265   Q 159 Back

266   Ev 85 Back

267   Broadcasting at the same time as scheduled broadcasts to traditional platforms.  Back

268   Ev 88 Back

269   BT had successfully negotiated deals with VPL/PPL, Warner Music, Paramount and Dreamworks. It had also acquired Premiership football rights and content supplied by various TV channels: Q 210 Back

270   Ev 100 Back

271   Ev 123-4 Back

272   79% of all viewing and 95% of new non-news commissioning: see UK TV content in the Digital Age - Opportunities and Challenges, Oliver & Ohlbaum Associates, page 8, section 1 Back

273   Ev 149. See also Talkback Thames Ev 443 Back

274   Review of the Television Production Sector, Ofcom consultation paper, paragraph 1.39. In early 2006, the main terrestrial channels accounted for 87% of expenditure on first releases; Ofcom expects that they may still account for 80% by early 2011 Back

275   Ev 149 Back

276   Q 287 Back

277   Ev 123 Back

278   Ev 450 Back

279   Ev 149 Back

280   Mr McVay Q 353 Back

281   Ev 136 Back

282   QQ 310-2 Back

283   Q 345 Back

284   Q 351 Back

285   Q 386 Back

286   See Ev 167 Back

287   Q 379 Back

288   QQ 381-2 Back

289   Uncorrected oral evidence given on 13 March 2007 as part of the Committee's inquiry into Public Service Media Content, available on Committee website; corrected version likely to be published as HC 316-II, Session 2006-07. Back

290   QQ 355-6 Back

291   Q 358 Back

292   Q 346 Back

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